Democracy Versus Capitalism: Take Two

My post last week has elicited a number of lengthy and interesting responses. Rather than answer one at a time I thought I would clarify and extend on my original thoughts.

This comment, by Ken Zimmerman, is my starting point:

Per the latest edition of Samuelson’s “Economics” the 2007-2009 financial crisis was bad, but it followed a half-century of spectacular increases in the living standards of most of the world, particularly those living in the affluent countries of North America, Western Europe, and East Asia. The book asks will these successes be repeated in the 21st Century, will the affluence spread to the poor countries? Or will the four horsemen of the economic apocalypse — famine, war, environmental degradation and depression — spread to the North? According to Samuelson and Nordhaus these are the questions this newest version of the number one selling Introduction to Economics textbook seeks to answer. You’ll notice little is said here about democracy. But elsewhere in the text Samuelson and Nordhaus talk of democracy and a market economy as the twin goals sought in Eastern Europe, China, and the former Soviet Union. What the protestors in these places protested against was socialism and what they protested for was “the hope that they many enjoy the freedom and economic prosperity of democratic market economics.” So Peter as far as the top Economics textbook is concerned you are dead wrong. And believe me this textbook reaches a lot more students and people in general than blog posts anywhere on any blog. That being the case, how would you suggest Samuelson and Nordhaus change their textbook, or in the alternative how would you change your position so that market economics and democracy work together? Samuelson and Nordhaus are smart guys. I would not want to dismiss what they say without a full hearing.

Here in a nutshell is the problem: economics writers, in their zeal to proselytize free markets, ignore that society has learned, the hard way, that those very free markets need to be severely hemmed in. Else the damage to society from the excesses of capitalism can, and often do, more than offset the benefits.

I do not have access to the textbook mentioned above so I cannot be specific in my response to Zimmerman, but the phrase that captures the issue succinctly is the one I have highlighted in bold text.

Let’s parse it out.

Note the conflation of “freedom and economic prosperity”. Those are two distinct phenomena. Freedom and economic prosperity are not ineluctably linked. More to the point: freedom and democracy are definitely not the same thing.

Freedom, as we find it hidden in the subtext of classical economics is freedom to own and dispense with private property. In this case the concept of property extends to include natural resources wherever it is possible to ‘privatize’ them. It is not a reference to any other notion of freedom as we may have come to think of it. It does not, for instance, include the freedom to vote or participate in society’s governance. It is a much more limited and specific notion with respect to economics.

Put it another way: the freedom to choose, to borrow Milton Friedman’s book title, is, within the realm of economics, the freedom to decide how to use private property for private gain. It is a very specific and pointed freedom. It is couched in terms of being antithetical to government control of decision making. In this vein perhaps the most vivid articulation of economic freedom is not Friedman, but Hayek. Economists in this tradition see most, if not all, government restrictions or activity within the economy as being antagonistic towards freedom.

This is what motivated Reagan to issue the rallying cry against Medicare. His speech decrying Medicare as the thin end of creeping socialism is often quoted by contemporary conservatives.

So when we read textbook economists talking about the intertwining of freedom and economic prosperity they are talking in very narrow and very specific terms. They are not talking about democracy, but about property rights.

Capitalism, as we know it, is simply the systemic manifestation of private property rights: people can do whatever they want with the resources available to them without regard to the social consequences. And the collective forum through which they exercise this right is called  a market. So a market is a social construct for the use, and/or abuse, of personal property rights as manifested by the exchange of resources, and the output of those resources. Uninhibited exchange, along with the prior condition of private property rights, is the core of capitalism.

Notice, however, that a market is a social construct. It takes two or more to tango. This social aspect has led to a series of modifications. Most importantly it has led to rules to protect those property rights. Contract law being an example. And the enforcement of property rights is the centerpiece of ‘allowable’ government intervention in the economy. So to libertarians and textbook economists the role of government ought to be limited to the protection of the individual’s right to own and dispense with property.

This is very far from most modern government. Hence the constant conservative attack on modern government.

But what is modern government?

I see it as a manifestation of democracy.

Think of the historical context in which democracy evolved.

Property rights were carved out of pre-existing authoritarian governance structures. The old aristocracies of Europe managed to force monarchs to surrender absolute and arbitrary control over property in return for the right to raise taxes. The aristocrats thus gained control over their property and promised to pay taxes based upon that, now protected, property. This was the first small step away from absolutism.

Next, as the need for taxes kept creeping up due to the rising cost of waging monarchical warfare, came the extension of property rights to a broader class of landowners. From here came the first representative governments. Representative, that is, of people who owned property. This is not democracy. It is, however, an extension of freedom.

This is the point at which modern economics begins to be conceived and written. The early classical writers were all obsessed with ‘proving’ that free markets – defined by private property rights being protected from arbitrary monarchical intrusion – created greater wealth for society at large, and hence the monarch too, than closed or restricted markets did. That was the question being posed by the early economists. It was natural that the conflation of freedom and economic growth took place. It was politically astute. And it was empirically justified. Those economies with the most advanced set of private property rights were, indeed, the most prosperous.

Prosperous especially for those with property.

Those without property were advancing too. But at extreme cost. Life expectancy and other measures of social welfare were collapsing as industrialization changed the landscape and lifestyles permanently.

Capitalism, as the combination of political and economic freedom was now called, was self-evidently a major success. The side effects and social consequences were dire.

To understand the nature of the discussion we can read the Ricardo and Malthus dialogs. Their references to workers are extraordinary for the dismissive moralizing and cynical disregard. Then, of course, there is Marx who lauded the wealth production of capitalism but abhorred it social ramifications.

At this point two directions appeared open: continuation of a restricted freedom and limited representative governance of society; or a Marx inspired march towards socialism. The middle way of democracy was a hard fought for compromise. It was resisted by conservatives as a precursor to socialism. The tyranny of the masses, don’t forget, is what stopped democracy from being America’s early form of government, and the series of social upheavals rocking Europe from the 1780’s through to 1848 simply strengthened conservative opposition to any broadening of the right to vote and thus to anything remotely like modern democracy.

But the excesses of capitalism came to be too much. The hardship and exploitation embodied in early industrialization led to both the Trade Union movement and to other social changes. The right to vote became pivotal in the fight against those excesses.

In other words: the creation of modern democracy was a reaction to, and very much in opposition to, capitalism. It was, from the outset, designed to mitigate the excesses. It was not at all to foster freedom, but to limit it. This limitation coming in the paradoxical form of extending participation in government even to those without property. The very definition of freedom was thus amended. Freedom was now the right to vote regardless of property ownership, which was still protected, but which was now abridged.

The creation of income tax is a clear indication of the new definition of freedom. It was a major intrusion into private property rights. But the benefits, the funding of society wide projects and the ability to finance wars without taxing property alone, offset this intrusion. It was victory for democracy over the older definition of freedom. It has been decried ever since by conservatives.

This has been a long exposition, but it is necessary. Economics textbooks still use the older, restricted, definition of freedom. And they sloppily elide the tension between democratic action to mitigate the effects of free markets and the action of the purist capitalism they preach. This is why textbook economics treats institutions, politics, and other constraints on markets so badly: the limited view of freedom within economics forces those things to be regarded as external to the problem it is trying to solve. Yet those things are the stuff of democracy, they are critical subject matter for understanding modern society. Economics omits them. Worse it treats them as hindrances to the proper working of free markets and thus propagates and anti-democractic story even while it lauds democratic market prosperity.

None of this implies that democracy and capitalism cannot be symbiotic. Of course they can. Indeed, the creation of modern democracy is the greatest bulwark against socialism that capitalists can ask for.

Hayek’s impassioned warning against creeping socialism has been proven wrong. By extending government action within the economy to provide health and retirement insurance, and to mitigate some of the other antisocial consequences of the unbridled exercise of private property rights, democracy has spread the wealth sufficiently to prevent to very slide into socialism that Hayek, and Reagan, were so anxious about. By allowing the majority to share more directly in the spoils democratic government has allowed capitalism to survive longer than Marx considered likely.

But we should never, ever, forget that the two systems are in constant counterpoise. Democracy balances and thus enables capitalism. It may complement it, but that is a complementation born of watchfulness and concern, not of not of simple cheerleading.

Why is this important to remember?

Because the capitalists resent the intrusion of democracy. They are always trying to revert back to the old definitions of freedom and its focus on private property.

This last election can be seen through that prism. Why else was Romney decrying the 47%? Why else do contemporary Republicans scorn the voters who elected Obama as being the ones who benefit from big government? These complaints are simply a recognition of democracy at work. They are examples of the new freedom that democracy brings to those without property, both to express themselves and to demand a share in the spoils.

That economics textbooks muddle this all up and confuse or conflate the political system with the economic system is a major ideological faux pas. People in Eastern Europe may very well clamor for economic freedom and democracy. That’s because they know that they need both. Without democracy they won’t be sharing in the spoils of economic freedom. In other words the economics textbooks purport to show how a society can generate wealth. They cannot demonstrate how to share that wealth.

Capitalism solves the first of those problems. Democracy solves the second.

The tyranny of the majority isn’t a tyranny at all if you are part of the majority. Capitalism benefits only those with property. The trick is to balance both so that neither destroys the other.

And in order to find that balance we need to understand that, unbalanced, they will indeed destroy each other. Or at least one will dominate sufficiently to give the appearance of destruction of the other. Which is where we are today in our deregulated world, its massive inequality, and the urge to introduce austerity policies that will hurt the majority.

Which is what I was talking about to begin with.